by Bill O’Grady

In recent weeks, Modern Monetary Theory (MMT) has become a hot topic of discussion. Given the level of controversy, we want to provide our take on the theory. One could wonder if this topic is appropriate for a geopolitical report. We are using this report to examine MMT because, in our opinion, its rise reflects the continued shift in the equality/efficiency cycle; essentially, MMT is yet another signal that we are seeing the waning days of efficiency and moving into the dawn of equality.[1] The equality cycle is not just a U.S. phenomenon but affects most developed economies. And, if the U.S. is affected by MMT then it will impact other economies as well. In addition, MMT could have a profound effect on the dollar’s reserve currency status, which will have repercussions for the global geopolitical situation.

MMT is a heterodox economic theory, somewhat related to Post-Keynesian economics. Its epicenter is the University of Missouri at Kansas City (UMKC). The current popularizers of MMT are three professors, Stephanie Kelton and Mathew Forstater, who teach at UMKC, along with L. Randall Wray, who teaches at the Levy Economics Institute of Bard College, another school that supports MMT. These colleges are not part of the “saltwater” or “freshwater” colleges that have been at the center of economic debates over the past four decades.[2] Instead, MMT represents a new paradigm.

Historical figures who are considered part of the “family tree”[3] are Georg Knapp, Mitchell Innes, John Maynard Keynes, Abba Lerner, Hyman Minsky and Wynne Godley. Keynes is well known; Minsky had his “moment” during the Great Financial Crisis. The rest of these names are rather obscure.

I started studying MMT a couple of years ago and must admit the theory seemed rather odd the first time I read about it. However, as I went through the theory, I was reminded of a useful bit of advice I received in graduate school. I was taking a graduate level course on Marx; the professor must have realized I was struggling with the material and he was kind enough to call a meeting with me. Essentially, he suggested that if I took the class simply searching for a reason to reject Marxism as a system then I would never really learn it. Instead, he suggested I keep an open mind and suspend judgment so I could learn the material. He assured me that although he would prefer I become a Marxist, it wasn’t likely to happen, and he was right—I didn’t. But, I did keep an open mind and learned Marx. The lesson from that situation is that an effective way to learn something that is completely outside the scope of the norm is to suspend judgment, work to understand the principles and fairly decide the strengths and weaknesses of the theory. I would urge readers to adopt this position if they are interested in the theory.

My goal in this report is to describe MMT, treating the theory as descriptive. Much of the popularity of MMT is coming from Left-Wing Populists[4] who are using the theory in a prescriptive manner. Vitriol on both sides has been increasing.[5]Ad hominin attacks have become the order of the day. It is my intention to examine the key elements of MMT and the potential policy ramifications, and let the reader decide what to think. However, more importantly, even if the theory proves to have flaws (and all do), it may not matter. MMT may not be correct but it will be useful in shifting the economy toward equality and away from efficiency.

This is an important topic and we will cover it in a series of four installments. In Part I, we will begin with origin narratives—how orthodox and MMT explain money. Part II will lay out the principles and consequences of MMT. Part III will examine the importance of theoretical paradigms in the equality/efficiency cycle. Part IV will discuss potential flaws of MMT and finally, as always, we will conclude with market ramifications.

These reports were prepared by Confluence Investment Management LLC and reflect the current opinion of the authors. Opinions expressed are current as of the date shown and are based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change. This is not a solicitation or an offer to buy or sell any security. Past performance is no guarantee of future results. Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice or a recommendation. Investments or strategies discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances.

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